Houston —
PDC Energy, a growing operator in two key US unconventional basins, moved to beef up its Wattenberg Field position in Colorado on Monday by agreeing to buy SRC Energy, a pure-play producer in the basin, for $1.7 billion in an all-stock deal.

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The transaction, which includes $685 million of SRC net debt, would make PDC the second-largest Denver-Julesburg Basin producer, with 166,000 b/d of oil equivalent, behind the former Anadarko Petroleum, acquired earlier this month by Occidental Petroleum, which has 301,000 boe/d.

"SRC's complementary, high-quality assets in the core Wattenberg, coupled with our existing inventory and track record of operational excellence will create a best-in-class operator with the size, scale and financial positioning to thrive in today's market," PDC CEO Bart Brookman said.

"We believe that this transaction will establish the combined company as a leader in the Colorado energy industry," said SRC CEO Lynn Peterson. "The transaction also provides SRC shareholders with the opportunity to participate in the significant upside potential created by a larger-scale DJ Basin producer with complementary assets in the prolific Delaware Basin."

The acquisition, which is expected to close in Q4, comes with about 61,000 boe/d of SRC production across that company's 86,000 net acres in Weld County and about 306 million boe of oil and gas reserves.

Pro forma, the combined company will produce about 200,000 boe/d in second-half 2019.

"We expect having a larger scale also will improve our working relationships with service companies and midstream providers in the basin," said Lance Lauck, PDC's executive vice president of corporate development and strategy.

At $55/b WTI, pro forma free cash flow is targeted at around $800 million from now through year-end 2021, about 50% of which will be returned to shareholders, Lauck said.

PDC has repurchased $125 million of its own shares year-to-date and plans to raise its existing share repurchase program from $200 million to $525 million by year-end 2021. The other $400 million of free cash flow will be used to complete the remaining $400 million repurchase program, its executives said.

Lauck said the Wattenberg position will continue as a "highly efficient cash flow generator with ... low-risk inventory for reinvestment."

'PEER-LEADING' LOW G&A COSTS, LEVERAGE

General/administrative costs for the combined PDC/SRC will be what PDC called a "peer-leading" $2/boe in 2020. Also at $55/b, its pro forma debt/EBITDA leverage ratio will be a very low 1x, well below recent general bank guidelines for upstream companies of 3.5x.

The financial metrics are important for PDC, which recently went through several months of attempts by a shareholder to press for greater company returns. In May, private equity Kimmeridge Energy, which held a small 5.1% stake in PDC, unsuccessfully attempted to elect three new PDC board members.

In the weeks leading up to the May shareholder vote on the matter, Kimmeridge claimed the producer had missed its own internally set performance metrics and thus failed to grow shareholder value. However, proxy advisory firm Glass Lewis recommended against Kimmeridge's board nominees, saying neither the case for board member change nor the suggested new nominees were compelling.

Under the deal terms, SRC shareholders receive an exchange ratio of 0.158 PDC common shares for each SRC common share they own. The exchange ratio implies a price of $3.99/SRC share based on PC's Friday closing price of $25.25/share. SRC shares closed Friday at $4.15/share.

WATTENBERG FOCUS

PDC will have approximately 182,000 consolidated net acres in the core of the Wattenberg formation, of which nearly 100 percent is located in Weld County, Colorado.

Approximately 80% of the gross acreage position is in unincorporated rural Weld County, while the remaining 20% is located within municipal boundaries, with the city of Greeley accounting for about half of that total.

Rural locations in the DJ have become much more crucial for producers due to the rapidly growing population along the Front Range coupled with the passage of Senate Bill 181 earlier this year. The bill, which is going through a lengthy rulemaking process, gives more local authority to cities and counties in approving drilling sites and pads.

Multiple cities and counties across the Front Range enacted bans and moratoriums on hydraulic fracturing over the past several years. Since Senate Bill 181 became law, several more have enacted moratoriums until the law is finalized.

However, Weld County commissioners are supportive of the oil and gas industry, as well as groups such as the Greeley Area Chamber of Commerce, stressing its importance to the local economy. Several producers have strategically worked to grow acreage in rural, unincorporated areas of the DJ in order to avoid potential conflicts with surging residential development.

Of PDC's municipal acreage, it reports it has already received local approval for approximately half of its permits while the rest are currently being processed.